Ahold and Delhaize: off their trolleys?

The shoppers are lined up outside - and the store may not even open. Shares in European supermarket chains Ahold and Delhaize rose by a combined €2bn on Monday following news of early stage merger talks. The former rose 6 per cent, the latter 14 per cent. If equity markets enthusiasm counts for anything, that box is ticked.

If there were to be some sort of deal between the Dutch and Belgian groups it would, of course, be all about the US. Both generate about 60 per cent of their revenues there - Ahold through its Giant, Peapod and Stop & Shop brands; Delhaize through Food Lion and Hannaford. In a consolidating US grocery market, the success or failure of this combination would rest whether the combined company could generate cost savings and improve its buying power in the US.

But do not ignore the European element. With Ahold headquartered in the Netherlands and Delhaize in Belgium, the national politics would be delicate. To make everyone happy they would probably label the deal a "merger of equals". It would, of course, be nothing of the sort. Before Monday's share price moves, Ahold's market capitalisation was twice that of Delhaize. Still, it would be a big bite for Ahold. Assume an all-cash, debt-financed acquisition of Delhaize by Ahold, at today's valuation. The Dutch group's net debt would rise from under one times earnings before interest, tax, depreciation and amortisation to more than three. That said, there is a big prize - shaving a tenth off combined operating costs would add about a third to combined ebitda.

That might turn out to be optimistic. By combining, the two would face all the usual risks of M&A and would also have to placate the competition authorities. The deal may look like a bargain for Ahold - it usually trades at a premium to Delhaize but the gap between the two has been wider than usual of late. But as any seasoned shopper knows, bargains are not always as good as they first appear.

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